Those Who Learn from History Are Doomed to Repeat It

Frank J. Fabozzi, K. C. Chen, K. C. Ma and Ramesh Rao

Journal of Behavioral Finance, 2024, vol. 25, issue 2, 151-166

Abstract: We see the stock market constantly responding to changing signals. These inputs are perceived to be highly structured in both space and time. Such regularities in the environment allow expectations about the future to be formed, facilitating current investment decisions. Perceiving the continuous stability is exploited by the brain, creating a bias in perception to generate serial dependence. Therefore, stock price dependence may be simply a result of the behavioral dependence in the decision process. The empirical evidence presented in this paper confirms that the dependence in every facet of an investment decision process has contributed to the observed stock price dependence. The largest contributor is by far from investors’ memory dependence, exceeding 80%. If history is the record of past decisions going through the brain’s neural pathways, the memory dependence or “memory of the memory” occurs when people follow the same old neural pathway over time. As paying attention to history is an obvious mental visit to the memory neural pathways, those who study the history are doomed to repeat it.

Date: 2024
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DOI: 10.1080/15427560.2022.2100387

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